British house prices fell more sharply than expected this month as the downturn, which began in the summer, gathered pace. The data from Nationwide came as a senior Bank of England policymaker warned that the government's spending cuts will damage Britain's economic growth.

Nationwide's monthly house price index showed a 0.7% fall in October, nearly twice as steep as economists had expected. This took the quarter-on-quarter drop to 1.5%, the biggest decline since April 2009. It said that the value of the average British home fell by £2,376 during October, to £164,381.

Separately, the Land Registry added to fears of a double-dip in the housing market by reporting a 0.2% drop in house prices in September.

Despite the 0.8% jump in GDP reported this week, Adam Posen of the Bank's monetary policy committee is concerned that George Osborne's plans to cut the deficit will cause significant damage to economic growth. In an interview, Posen, an expert on Japan's "lost decade", said the recovery was still weak.

"My forecast is the government's plans for 2011 and 2012 will have a material down-drag on inflation and on growth," he explained. "My concern is, on balance, that we are much more at risk of too-slow growth and, as a result, too-low prices."

Posen was the only member of the MPC to vote for an increase in the Bank's quantitative easing programme at its last meeting.

Stimulating the economy through QE could help house prices, Nationwide argued, by lowering borrowing costs and making more money available to lenders. However, an early extension of QE now looks less likely following the stronger than expected growth in GDP over the third quarter. GDP growth better than 0.8% growth recorded in the third quarter of 2010.

Weak

October is the third month in four in which house prices have fallen, according to Nationwide, following drops of 0.5% in July and 0.9% in August, and flat prices in September. This means prices are now just 1.4% higher than a year ago, compared with 3.1% higher in September.

After plunging during 2008, house prices began a surprisingly strong rally in May 2009. The Land Registry said the West Midlands saw the biggest price fall in September, down 1.4%. The picture was brightest in Yorkshire and the Humber, where prices gained 1.5% during the month.

Howard Archer, of IHS Global Insight, warned that the housing market is in a weak state, pointing out that mortgage approvals for house purchases slowed to an 18-month low in September.

"High (and likely to rise) unemployment, muted wage growth, an increasing fiscal squeeze, low and deteriorating consumer confidence, difficulties in getting a mortgage (particularly for first time buyers), a housing supply/demand balance currently firmly in favour of buyers and a house price/earnings ratio above long-term norms are a poor combination of factors for house prices," said Archer in a research note.

Archer believes that house prices will fall by another 10% by the end of 2011.

Catherine Penman, head of research at Carter Jonas property consultancy, said that demand had softened in recent months but rejected the suggestion that prices might be about to collapse.

"Prices are edging down but they have not gone over the edge – and nor do we expect them to," Penman said.

"Looking forward, we expect a far higher degree of correlation between property prices and the economy. If the economy strengthens, so will the property market, if it weakens, expect prices to fall," she added.

The Ernst & Young Item Club added to the nervousness last week by declaring that the British housing market "clearly looks as if it is heading for a double dip," with current prices unsustainably high.